Tuesday June 25, 2024

Institutional reforms and Pakistan’s economic performance

By Dr Noor Fatima
March 23, 2023

The idea of institutional reforms is not a spontaneous one. From the 1980s, global economic dynamics have drastically changed, especially with the method of mutilators managing developing countries under the guise of providing financial support in the form of grants, which inevitably turn into loans. The question is whether traditional economic and social institutions can be sustained with rapid changes to fiscal constraints of the state or will there be a need to reform institutions to make them more responsive to emerging economic challenges.

Since the 1980s, the institutional performance of a country visibly translates into its economic growth. Many developing countries facing debt trap have concluded that the biggest reason for failing economies is not limited technical capacity, but institutional decay. It has further been underlined by multilaterals such as IMF and World Bank that for institutions to perform better in terms of economic production, institutional economics are imperative.

To have a significant impact on economic growth, there is a dire need for corresponding economic, political, and judicial institutional reforms in Pakistan. Political instability and economic volatility cannot support economic growth as they create an environment with credibility issues for investors. Economist Douglass North, as the main proponent of institutional economics, has defined institutions as “humanly devised constraints that shape human interaction.” The transaction cost of the production of goods and services is reduced if the institutional set-up of a country displays precision. Institutional reforms are significant at the growth stage of a country and remain relevant at the stage of crisis. Currently, Pakistan is going through a financial crisis that is only going to worsen in the upcoming months due to institutional deficiencies.

Looking back at Pakistan’s institutional reforms landscape from 1990 onwards, it is obvious that political instability adversely affected the economic growth of the nation, making it lag behind its regional peers. As per various international reports, Pakistan’s institutional and governance capacity has deteriorated since the 1990s - reaching rock bottom during the last decade - whereas the role of multilateral institutions like World Bank and IMF in the country’s economic system have enhanced.

Over the last two decades, many reforms have been introduced in legislative, judicial, and executive institutions. Unfortunately, these reforms never find an environment that is socially or politically conducive to supporting institutional development. Pakistani society is unable to accept, or even demand change in institutional capacity; all these reforms were brought about on demand of international institutions like IMF and World Bank in their respective sectors under the name of structural adjustment - when in reality, they were brought about just for the sake of meeting conditions of supply side management. Externally driven reforms do not get public ownership in Pakistan and are less likely to have a concrete impact on the efficiency of institutions, until unless they are taken up as high political agenda by the government. As a result, only incremental changes can work in Pakistan since a sharp deviation is always resisted.

The accountability system in Pakistan has seen a few reforms as well, resulting in the objectivity of institutions like the National Accountability Bureau (NAB) coming into question, despite judicial law making.

One reform is the establishment of a regulatory framework in Pakistan for attracting national and international investors in finance. The regulatory framework was provided particularly for the privatisation of public entities. It was a cornerstone of Pakistan’s economic reforms since the late 1990s, particularly in the utilities sector for energy, power, telecommunication, and media. It was based on the concept of decentralising the government and reducing the control of the bureaucracy to create a mainstay between consumers, investors, and the government.

The concept of regulations was created by modern institutional development and pushed by funding agencies like World Bank to attract investors. In most countries, these regulations are handled by one body known as the Public Utility Regulatory Commission, however, in Pakistan, we have established four main authorities, just for dealing with utilities. This has led to a huge employee burden, as well as allowing for an excessive interventionist approach of controlling ministries within the bodies.

The reforms related to civil services are another hallmark of the last decade, especially after the drive of privatisation and deregulation to move towards a market economy. Transformational changes were required to decentralise the bureaucracy, and make it more collaborative, efficient, and responsive to good delivery. Other civil service reforms have also been passed in the last decade.

New Public Management (NPM) is a well emerged concept for such reforms, producing better performance results than the centralised bureaucracy.

Reforms in all sectors of Pakistan are taken as just technical exercises to meet donor conditions and not as legitimate solutions to real issues. Historically, the political instability of Pakistan is the cause of the prevailing of rent seekers in these institutions. Short-run governments do not focus on long term economic development goals. The performance of the planning commission of Pakistan is an example of this.

Since the emergence of Pakistan, one can conclude that efforts made by the government towards institutional reforms have not produced the desired results for institutional economics. We see institutional decay, which produces corruption, lack of transparency, inefficient service delivery, bad economic governance and a lack of control of financial regulation. What the nation needs are “supply side” reforms connected with socio-economic conditions. Previously, all efforts were made on the basis of demand side management of reforms. If this absence of institutional reforms continues into the future, rent seeking and an ill-performing governance cannot be avoided.